Happy Tuesday. I just wanted to check in with you briefly and give you my thoughts on the stock market.
As you are probably aware, the stock market has been very volatile in 2018 (and especially the last few days), with extreme moves to both the upside and downside.
If you have had a financial plan completed recently or you have been coming in for regular investment reviews (annual reviews are recommended), then you know that I have been cautioning people that a correction was possible for a while now. The main reason is due to the fact that the stock market has gone up so quickly; it seemed like the Dow Jones was breaking records on a daily basis in 2017. That kind of growth is not normal and is unsustainable.
So, the down moves we have seen in the last few days were not unexpected. However, the size and speed of the moves were a surprise.
The economy is doing well, so there was no fundamental reason for yesterday’s large decline. In fact, the stock market may have dropped because of recent good news in the economy. Last week the labor reports and consumer income were better than expected. This caused concern that inflation would rise and that the Federal Reserve would raise interest rates faster than expected.
Several sources that I have been reading (Charles Schwab investor insights, Morningstar.com, other financial planners) indicate that these are the main factors that have caused the recent downturn:
– The fear of rising inflation due to better than expected wage and job growth
– Rising interest rates
– Concern that the Federal Reserve will raise rates faster than expected (consensus is three rate hikes in 2018)
– Investor sentiment: strong investor sentiment is contrarian and could mean a pullback is coming
– Computer based trading: stop orders and automated trading could have contributed to yesterday’s down movement
So, is the bull market ending? Not necessarily. This could be just a pullback to more “normal” market values. While the past few days have been stressful, analysts believe this is a normal pullback, not the beginning of a bear market.
To put things into perspective, here are the returns for the S&P 500 for various time periods:
Monday 2/5/18: down 4%
YTD: down 1% (as of 2/5/18)
2017: up 21.83% (the last 12 months are still up over 17% even with the decline in the last few days)
2016: up 11.96%
3-year average: up 11.41% (ending 12/31/17)
5-year average: up 15.79% (ending 12/31/17)
10-year average: up 8.50% (ending 12/31/17)
Even though the last few days have been down, most portfolios still have very large gains from 2016-2017, and from a longer perspective the strong bull market that began in 2009.
So, the bull market may not be ending, but the stock market is expected to be volatile going forward. It’s been a long time since we have seen a decent correction and this level of volatility, so now might be a good time to review your portfolio.
It’s natural for people to want to do something when the market is going down, so here are the things you should be doing now:
– Review your portfolio to make sure it matches your risk tolerance and time frame
– Rebalance annually to avoid over exposure to rising asset classes (i.e., too much stock after a strong bull market)
– Make sure you have plenty of cash on hand. A good rule of thumb is 3-6 months of living expenses if you are still working and 1-2 years of living expenses if you are retired. This will keep you from having to sell investments if/when the stock market is down.
– Don’t panic. The market is much more volatile than last year; expect ups and downs and understand that a move down doesn’t necessarily mean a bear market is coming.
I hope this helps. If you have questions or want to schedule a review, please feel free to contact me. However, remember that it is tax season, so be patient if you are requesting an appointment, it may take a few weeks to get you scheduled while I get through tax season.
All the best,
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Kristine McKinley is a Kansas City fee only financial planner. Kristine provides retirement planning, tax preparation and planning, investment reviews and comprehensive financial planning on a fee-only, as needed basis. To schedule your complimentary introduction meeting, please contact Kristine at email@example.com.